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Supply Chain News: Still High Flying Times in US Distribution Center Space Market

 

Vacancies Down to 17 Year Low, JLL Report Finds, Even as New Construction Continues at Rapid Pace

April 24, 2017
SCDigest Editorial Staff

It has been a pretty wild ride for US warehouse and distribution center space for several years, driven by the relentless rise of ecommerce and related fulfillment needs.

In January, for example, warehouse space owner Prologis reported that occupancy rates at its facilities hit an incredible 97.1% in the fourth quarter of 2016 - an all-time high. Prologis saw rents in the U.S. jump by more than 23% year over year, the company said, with global rates increasing by 16%.

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Amazon is looking for an amazing 1300 smaller DCs spaces in urban areas in the UK, France, Germany and Italy, to support its one hour Prime Now delivery service.


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Real estate firm CBRE reported similar news at the time, saying in urban areas such as Los Angeles and Seattle less than 5% of total warehouse capacity is available for leasing, sending rates soaring.

But there were signs the market might be slowing down, in good news for shippers. For example, Prologis CEO Hamid Moghadam said in January that "We are getting into the more mature part of the cycle. It's more of a balanced market, with modest rental growth."

Similarly, CBRE said it expected industrial real-estate completions to consistently top 50 million square feet per quarter this year, a key threshold that usually signals stable availability rates.

Well, perhaps those signs of market moderation were still a little premature.

In its early "flash" on Q1 trends in industrial property, which primarily consists of distribution center space, Jones Lang Lasalle (now JLL) said that overall vacancy rates fell to just 5.3% in the quarter - the lowest figure in 17 years.

"This is despite a steady flow of new construction in most markets," JLL commented.

In fact, there's been a robust construction pipeline in Tier I markets for over four consecutive years now. JLL says new groundbreakings are up by 22% from last quarter. Dallas, the Inland Empire in California, Philadelphia, Denver, and Atlanta together accounted for 54% of this new development pipeline.

JLL says that construction pipeline continues to grow, led by a significant increase (up 29% versus the fourth quarter) of construction activity for build-to-suit (BTS) properties. But while owner-builder and BTS demand is strong, the speculative building pipeline also remains robust, JLL says.

After delivering a huge 224.5 million square feet of DC space in 2016 (think of that - the equivalent of 225 one million square foot facilities), JLL expects 2017 to be another solid year for new construction, slightly exceeding 2016's robust build out, as seen in the graphic below.

 



But despite all that construction, demand appears to be more than keeping pace. JLL says that 26.9% of speculative buildings were leased in the construction stage, up a bit from Q4 2016 and a very good number for builders.



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What's more, total net absorption - a measure of how much DC space was leased net of abandonments - continues to outpace new deliveries, JLL says. Net absorption declined a bit in Q1 from the previous quarter but showed a strong 11.9% year-over-year increase.

Philadelphia (which includes the Allentown area) alone absorbed nearly 8.2 million square feet, followed by Dallas and Atlanta. Those three markets contributed to 34% of total US absorption gains

In New Jersey alone, in Q1 industrial tenants signed 69 new leases totaling 5.16 million square feet. Big-box distribution space dominated leasing deals, with transactions for more than 100,000 square feet representing 69.5% of the state's total leasing activity. The amount of industrial space absorbed in the state amounted to 1.7 million square feet, more than the 1.3 million square feet absorbed in the same period the year before, JLL found.

Industrial tenants "are facing a new normal," another JLL report said, noting that asking rents in New Jersey have increased 34.4% during the past five years.

Of course, Amazon is driving much of this. It announced on Friday that it will open three more fulfillment centers totaling 2.8 million square feet in three New Jersey cities: Cranbury Township, Edison and Logan Township.

And the Amazon effect on DC space market is a global one. For example, news came last week that Amazon is looking for an amazing 1300 smaller DCs spaces in urban areas in the UK, France, Germany and Italy, to support its one hour Prime Now delivery service in those markets.

In 2016, Amazon accounted for more than a quarter of all warehouse space rented in the UK, according to analysis by real estate firm Savills.

What's your take on the US market for DC space right now? Will the dynamics change any time soon? Let us know your thoughts at the Feedback section below or the link above to send an email.

 

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